With the Fed officially announcing a quarter-point short-term interest rate hike to 2%, traders and borrowers now have a blueprint for future action. Some sectors are expected to act immediately.
A strong U.S. dollar, while great news for fans of the greenback, may make it tougher to borrow for individuals and businesses, and the decision to hike the interest rate, though expected, will ripple through equities and currency markets throughout the remainder of the week.
“The move may be more muted in the stock market,” said Kevin Dixon, senior trading analyst at Market Traders Institute. “There will be no interruption to the current bullish environment, only a flash reaction to the announcement itself.”
Dixon looks back nearly two decades as a historical marker for how the markets may react after today’s press conference (see chart). The chart shows 18 years of data from two previous bear markets and how the Fed reacted. In each case, the Fed moved quickly to reduce rates once a crisis was recognized.
Interest rates rose rapidly from 2004-2007, and plateaued at 5.25 where rates held steady until the subprime meltdown in late 2007 and 2008. Here again, according to Dixon, the Fed intervened to reduce market tension.
“Ten years ago, the interest rate held at 2% from March to September 2008 on the way down as the Fed raced to curb the subprime mortgage meltdown,” Dixon said. “We could potentially see today’s announcement as the final rate increase for the year.”
Dixon anticipates one more interest rate increase this year, and forsees certain sectors becoming active at the time of today’s announcement, including the financial, homebuilding, automobile manufacturing and insurance sectors.
“The broader market will react, but I think the greatest impact will be reflected throughout the financial sector,” Dixon said. “Keep an eye on Goldman Sachs (GS), Wells Fargo (WFC), Mastercard (MA), Visa (V), Ford (F), General Motors (GM) and Lennar (LEN) for potential action after the announcement. Credit cards, in particular, are very responsive to any change in rates due to the very nature of the business revolving around credit lines and loans.”
As always, Dixon said, “pay close attention to the exact wording used by the Fed” during the press conference. Any ambiguity in the language may trigger feelings of uncertainty and volatility in the markets. A definitive statement about future rate decisions in 2018 may result in a spike in market movement in either direction.
‘The markets will adjust to the level quickly,” he said. “This isn’t an unexpected announcement — a rate hike has been anticipated for several months and has been factored into the currency pricing we’ve seen in the forex. Even if more rate hikes are coming, traders and investors should be well-prepared to adjust accordingly. The market moves in waves, and we’ve seen this all before.”